U.S. Federal Reserve Holds Rates Steady

On January 31, the Federal Open Market Committee (FOMC) announced its unanimous vote to leave the target range for the federal funds rate unchanged at 1.25% – 1.50%. The decision was so widely expected, it represented a non-event for markets.

The economy and labour market are strong

The FOMC announcement noted that “the labour market has continued to strengthen and economic activity has been rising at a solid rate.” But with the recent rate increases—three in 2017—holding steady now makes sense.

All signs point to a hike in March and continued gradual increases after that—of course, the size and timing of those increases will depend on realized and expected economic conditions relative to the Fed’s objectives of maximum employment and its 2.00% inflation target.

Inflation predicted to increase

It’s a refrain we all know well by now: inflation remains low. But the FOMC expects it to move up this year and stabilize around its target.

End of a (brief) era

This unanimous FOMC vote ends Janet Yellen’s four year term as Fed Chairwoman. Jerome Powell was recently confirmed by the senate as the new Fed Chair, and will begin his term February 3rd.

Apart from a few aspects—Yellen’s brevity and Powell’s credentials—the transition is unremarkable. Powell has been on the Federal Reserve Board of Governors since 2012, and has voted in line with Yellen for much of that time.

The markets view Powell’s appointment as a continuation of previous leadership. But his actions over the next two quarters will confirm whether this is the case.

U.S. equities, now and later

Markets were flat in response to the Fed’s announcement. We still believe equities in general will outperform fixed income, however equity returns in 2018 will likely not be as generous as in 2017.

The FOMC’s decision to hold interest rates does not call for any immediate investment strategy adjustments. Our portfolios remain positioned with a tactical overweight allocation to equities in general, and to U.S. equities in particular, relative to other asset classes. Additionally, we are positioned somewhat defensively in U.S. equites as they are becoming fully valued. The FOMC’s decision and its expectations for future growth confirm that the economy is on good footing, which will continue to favour equities.

We will evaluate and adjust our portfolios accordingly as we continue to monitor the strength of the U.S. economy, particularly with respect to interest rates in 2018.

About the Author

Patrick Ercolano, CFA, MBA, is a Lead Portfolio Manager with the Investment Management and Strategy team at MD Financial Management. He oversees strategic and tactical asset allocation mandates, alternative investment mutual funds and is a member of MD’s Tactical and Risk Allocation Committee.